Buying the Farm

San Diego  When Pete DeJung applied for a bank loan to start a dairy in 1951, he was turned down. "We didn't speak the language very well," recalls DeJung, who is Dutch. "We were very green in the ways of American business. But Mr. Butler - a citrus grower in Escondido, a very important man on the water board - heard of a family that was trying to get started. He didn't know us very well, but he just thought we were going to make it." Mr. Butler loaned the DeJungs around $11,000; together with their $7000 and the interests of the land's previous owners, they managed the $30,000 price tag and started Hollandia dairy on the corner of Center City Parkway and Felicita in Escondido. They had about 30 cows. The first day's receipts were around $21.

Today, Hollandia dairy claims 125 acres and 1000 cows in San Marcos, another 2500 cows in the Hanford area (in the San Joaquin Valley) and a daily production of 50,000 gallons of milk. Pete DeJung doesn't get turned down by the banks anymore, but things have only gotten tougher for the beginning farmer.

"Every year, the average age of the farmer in the United States gets older and older and older, because the biggest barrier for entry into agriculture is capital. Where are you going to get the money to get started? Who's going to lend it to you?" The speaker is Pat Carey, vice president and manager for the Escondido branch of Farm Credit Services of Southern California, a "for-profit, member-owned cooperative," which makes loans to farmers. Carey, bespectacled, well-trimmed, and solid, is all clear gaze and firm handshake, an ideal player for the role of loanmaker to the folk who work the land. But as he says, the folk are getting more venerable every year.

"Start-ups are difficult. To forecast the future, you rely on history, and if you have no history, and if it's raw land, then it's hard for me to forecast the likelihood of your success. I have to have some idea of the productive capacity of the land and of what you bring to the deal." Experience helps, of course. "Let's say you were brought up on the farm, and you'd been operating the family business for a number of years, and we had a pretty good feel about your management capability, as well as the productivity of the farm." Even if the bank knows you're good at what you do, there is still the matter of backing it up. "Maybe the family could help with collateral and guarantees. Or we've made loans where the parent agrees to subordinate his lien on the property, gives us the first trust deed. The money that's still owed to the father, it's family debt, and we don't see fathers foreclosing on sons too often. It mainly gets back to, you've got to have family support." It sounds like the worst kind of exclusivity. Unless you're fabulously wealthy or born right, you can't join the future farmers of America. There is hope, though, for the moderately wealthy, as Carey explains. "Let's say you come from the city, and you want to buy an avocado grove, and we know the property." Loans for avocado groves are a specialty of this branch. Others specialize in dairy loans, table egg loans, or loans for fat cattle. "Permanent plantings aren't as management intensive - you can hire a service to do that work for you and pickers, and there are any number of good marketing organizations. People buy ten acres to supplement their income, [enhance their] lifestyle, maybe build a weekend place. It's beautiful out there in those groves.

"If you came in today," Carey continues, "looking to buy an avocado grove, we would probably lend somewhere between 50 and 60 percent of the appraised value, and maybe up to three or four thousand dollars an acre. We would weigh those two, based on the historical production of the grove [good production is 8000 pounds to the acre] and the fair market value, driven by comparable sales. We would weigh those two with your overall position - non-farm income and farm income alike - and see what kind of loan we could write. It would probably be 15 to 20 years; rates are going to be in excess of prime, 9 percent, anyway. You have to tie that to the overall complexity of the deal. It's not like when you call [someone] for a loan on a house."

Before you jump at the chance to get back to the land, keep in mind the current crisis in the avocado industry, the issue of Mexican avocado importing. "We don't know what's going to happen with the avocado industry," Carey warns. "I think it places a cloud over things. I wouldn't think we would have a lot of people jumping in or out right now; they're going to wait and see."

Other problems plague the farm industry, problems that slow real estate sales and the loans that accompany them. "Water has had the greatest negative impact on us up to now," Carey reports. "Prices have nearly tripled in the last eight years. We've had farms that were not necessarily failing on our books, but if you had a marginal grove, and water was $300 an acre-foot, it won't work at $700 an acre-foot.

"Land use could have a big impact on us, zoning density. The endangered species act. The gnatcatcher, the kangaroo rat. Persea mite hit us badly, but we seem to have that under control right now." Not only do these things reduce the number of new loans, they can also make some standing loans look a little weak in the knees. "Ninety percent of our loans are what you call fully acceptable loans - they're paying, you're secured. That puts you with 10 percent [a high estimate] of loans that are struggling."

Struggling can mean anything from missing a payment to carrying a seasonal loan over to the next couple of years if the crop is short. "There are times when you need to forbear on a regularly scheduled installment. That's where customers look for you to be knowledgeable of their business, what their capabilities are." And while there are seminars and magazines and avocado societies, nothing tells you about the business like a visit to the land in question. "When you're out looking at your crops, that's an excellent time to be brought up to speed on issues."